Swing options in commodity markets: A multidimensional L\'evy diffusion model
Pricing of Securities
2013-02-27 v1 Probability
Abstract
We study valuation of swing options on commodity markets when the commodity prices are driven by multiple factors. The factors are modeled as diffusion processes driven by a multidimensional L\'evy process. We set up a valuation model in terms of a dynamic programming problem where the option can be exercised continuously in time. Here, the number of swing rights is given by a total volume constraint. We analyze some general properties of the model and study the solution by analyzing the associated HJB-equation. Furthermore, we discuss the issues caused by the multi-dimensionality of the commodity price model. The results are illustrated numerically with three explicit examples.
Keywords
Cite
@article{arxiv.1302.6399,
title = {Swing options in commodity markets: A multidimensional L\'evy diffusion model},
author = {Marcus Eriksson and Jukka Lempa and Trygve Kastberg Nilssen},
journal= {arXiv preprint arXiv:1302.6399},
year = {2013}
}